Opinion: Shopify shares rise as tech company announces 10-for-1 stock split - The Globe and Mail

Tobi Lutke, CEO of Shopify, in the company's Montreal office on Feb. 18, 2015.Paul Chiasson/The Canadian Press

Shopify Inc. SHOP-T co-founder, chair and chief executive Tobias Lutke has three young children. The billionaire is willing to give up the opportunity to pass along the company to his offspring in exchange for maintaining control for as long he works at the online commerce giant.

Ottawa-based Shopify, Canada’s largest tech company, announced on Monday it plans a 10-for-1 stock split in late June; the share price promptly jumped by 3 per cent on the Toronto Stock Exchange. Shopify is the latest tech company to see its shares soar on news of a split; similar moves took place at Amazon.com Inc. and Tesla Inc. in recent weeks.

The Shopify board also unveiled a governance structure that would award Mr. Lutke newly minted founder’s shares that lock in 40 per cent voting control, even if the company issues additional stock – for example, to pay for a takeover – or Mr. Lutke sells a significant portion of his stake, currently worth more than $5-billion.

Shopify proposes changes to governance structure, announces 10-for-one share split

What is a stock split? Shopify is the latest tech company to announce its plans

The wrinkle here is the 41-year-old founder’s new shares come with a sunset clause – they expire when Mr. Lutke leaves Shopify, or his holding falls to less than 30 per cent of current levels.

If shareholders approve Shopify’s restructuring at a vote scheduled for June 7, the country’s tech flagship will go from a dual-share company that can pass control through generations to a one-share, one-vote structure after the founder’s departure.

“These changes will enhance Shopify’s strategic flexibility,” Robert Ashe, Shopify’s lead independent director, said in a news release. “Tobi is key to supporting and executing Shopify’s strategic vision, and this proposal ensures his interests are aligned with long-term shareholder value creation.”

Shopify’s board unanimously recommended shareholders vote in favour of the new structure, along with the stock split. Investors should applaud this evolution. In a 2019 report, Institute for Governance of Private and Public Organizations chair Yvan Allaire said sunset clauses have “gained salience as institutional shareholders and various agencies try to curtail, rein in and put a time limit on the relative freedom that a dual-class of shares provides to entrepreneurs and family corporations.”

Shopify’s plans are a welcome break from the entrenched ownership at many family-controlled companies, including Rogers Communications Inc., and at entrepreneur-controlled tech businesses such as Facebook parent Meta Platforms Inc.

While more than 60 companies with dual-class shares are listed on the Toronto Stock Exchange, a number of entrepreneur-led companies, such as Onex Corp. and Alimentation Couche-Tard Inc., feature sunset clauses, similar to the planned structure at Shopify. It’s worth noting that Couche-Tard’s founders tried to extend their control of the company in 2015, only to abandon the move in the face of shareholder resistance.

Mr. Lutke founded Shopify in 2004 after writing the software needed to operate his online snowboard business. The company went public in 2015, with investors offered Class A shares that carry one vote, while Mr. Lutke and other insiders maintained control by owning Class B shares that carry 10 votes each, stock that can be transferred to spouses or offspring.

Last year, regulatory filings show, Mr. Lutke cashed out $623-million in Shopify stock under an automatic sales program put in place more than two years ago.

Right now, Mr. Lutke and Shopify director John Phillips, a retired lawyer and early investor, control 97 per cent of the company’s Class B shares, while current and former employees and directors own the rest. If shareholders approve the founder’s share, Mr. Phillips will convert all his class B shares into single-vote shares.

After Mr. Phillips swaps his multiple voting stock, Mr. Lutke will hold about 40 per cent of the votes at Shopify. In a news release, the board said using the founder’s shares to preserve this stake “was appropriate as it is approximately the voting power he would hold under the current share structure.”

Shopify’s stock price dropped off sharply in recent months, as did that of many growth-focused tech companies, on concerns about a postpandemic slump in online commerce. However, analysts say the company continues to be a dominant player in a rapidly expanding sector. In a report last week, RBC Capital Markets analyst Paul Treiber said: “Shopify has a number of catalysts that we expect to help accelerate revenue growth and expand the company’s long-term total addressable market.”

Over the next two years, Mr. Treiber forecast Shopify’s gross merchandise volume, or the total value of orders processed on the platform, will increase from $175-billion to $310-billion annually.

Shopify’s new governance gives Mr. Lutke every opportunity to expand the company, confident in his control. The sunset clause in the structure simply means shareholders aren’t forced to give that same unfettered support to his three kids.

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2022-04-11 22:15:03Z
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